Banks and industry groups have slammed plans by the Financial Services Authority and the European Commission to expand the remit of its proposed rules on pay and bonuses to the global operations of UK-based firms.

The rules were unveiled by the FSA two weeks ago in a consultation on its new remuneration code which will come into force next year. Most of the attention of the new proposals focused on plans to expand the number of firms covered from 27 big banks to more than 2,500 firms.

But the proposals also include plans – incorporated in new legislation from the European Union – to expand the territorial reach of the new rules to the global operations of all UK-based firms. This would mean that a UK bank would have to apply the same restrictions on bonuses to its staff in the US or Hong Kong as it would have to in the UK.

Industry groups including the British Bankers’ Association said the measure made it difficult for firms to run their businesses overseas and made them uncompetitive compared to local firms not subject to the same rules.

Irving Henry, director of prudential capital and risk at the BBA, said: “It would make it very difficult for UK and other EU-headquartered firms to recruit and retain staff in third countries.”

The BBA is consulting its members and expects to find opposition to global application of the pay rules.
A spokesman for a UK-based bank said: “If a jurisdiction like the UK takes steps that are a huge disadvantage to London and London-based firms then you have to consider what you do to mitigate that. If you’re not competitive, you’re not in business.”

New European Union legislation – known as the Capital Requirements Directive III – stipulates that the new pay rules requiring banks to defer 40% to 60% of bonuses must be applied to the worldwide operations of firms that are headquartered in the EU.

The FSA is the first national regulator to incorporate these rule changes to its own market. The rules will eventually be implemented across the EU and will impact all firms operating within Europe and the global businesses of companies headquartered in Europe.

Lawyers say these rules are tougher than the G20 principles on pay which other countries such as the US have signed up for.

The FSA’s consultation document said: “UK groups should apply the code globally to all their regulated and unregulated entities.” It also said that any UK subsidiaries of a parent not based in the UK – for example, a UK-based European investment banking business of a US bank – “must apply the code in relation to all entities… including entities based outside the UK”.

The FSA also warned companies captured by the extended geographic scope of the rules not to try to circumvent them by setting up special structures of offshore ventures, or to “allow or assist” staff who otherwise would come under the scope of the rules to avoid them

The rules could also hit hedge funds which have been incorporated as companies or limited partnerships in the UK, said Mark Ife, a partner at law firm Herbert Smith. He said legislators intended to use the measure to protect firms from financial problems within their headquarters and subsidiaries.

The consultation has come at a sensitive time for the UK economy as it only just emerged from recession. Asked recently if Barclays would leave the UK if the banking commission ruled in favour of a break-up, its chairman Marcus Agius warned that all banks were considering their options.

This month, Standard Chartered chief executive Peter Sands expressed concern about the uneven implementation of regulation around the world. Sands said the bank was considering leaving London for reasons including the bank levy and a government commission on whether big banks should be split up.

A spokesman for Standard Chartered, which draws the bulk of its earnings from Asia, Africa and the Middle East, said: “We want to ensure that we operate on a level playing field against other banks in our markets.”